Money, Output, and Inflation in the Longer Term: Major Industrial Countries, 1880–2001

Abstract

Abstract:We study how fluctuations in money growth correlate with fluctuations in real output growth and inflation. Using band-pass filters, we extract cycles from each time series that last 2 to 8 (business cycles) and 8 to 40 (longer-term cycles) years. We employ annual data, 1880-2001 without gaps, for eleven industrial countries. Fluctuations in money growth do not play a systematic role at business cycle frequencies. However, money growth leads or affects contemporaneously inflation, but not real output growth, in the longer run. Also, formal break tests indicate no structural changes for the longer-term money growth and inflation relationship, despite changes in policy regimes. JEL code: E3

Money Growth and Inflation: New Evidence from a Nonlinear and Asymmetric Analysis

“…We find evidence of causality running from a positive M 2 money supply shock to a positive inflation shock, and a negative M 2 money supply shock to a negative inflation shock for all three countries, consistent with the results of the NARDL estimation. The results, therefore, suggest that M 2 growth holds important informational content for the rate of inflation, consistent with the findings of Haug and Dewald (). Examining causality from the rate of inflation to M 2 growth, we find for the U.S, that a negative inflation rate shock leads to a positive M 2 shock, and for the U.K, a negative inflation shock leads to a negative M 2 shock.…”

“…In a study of inflation in Guinea over 1992–2003, Blavy () notes the existence of a long‐run relationship between money supply and inflation using cointegration and error‐correction methodology. Employing a long time series covering 1880–2001 for 11 developed nations, Haug and Dewald (), similarly find that changes in money growth do not consistently explain business cycle movements, however, that over the longer run, money growth affects inflation, but not real output growth. Despite policy changes, they do not find any evidence of structural breaks between money growth and inflation.…”

Changes in the relationship between short‐term interest rate, inflation and growth: evidence from the UK, 1820–2014

“…This also raises the question of which policy tools are there nowadays that will actually assist the Bank of England in prudently managing the domestic economy. The finding of no long-run effect of interest rate on growth seems consistent with Haug and Dewald (2011) who report money growth is unrelated to output growth at longer horizons.…”

Granger Predictability of Oil Prices After the Great Recession

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